Ghosts of incinerator bond deal haunt Harrisburg election

May 19, 2013|Reuters

* Democratic Party primary is on Tuesday

* City is poster child for mismanaged public finances

By Hilary Russ

May 19 (Reuters) - In Harrisburg, Pennsylvania's cash-hungrycapital city, local political battles are waged much as they areacross the United States: with big personalities andbare-knuckled verbal brawls.

But unlike most cities, Harrisburg's financial troubles havethrust it into the national spotlight, most recently with a slapfrom the U.S. Securities and Exchange Commission for fraud.Financing for a single incinerator has been driving the citytoward insolvency since 2009.

The $3.7 trillion U.S. municipal bond market will bewatching on Tuesday when Harrisburg, a poster child formismanaged public finances, holds its Democratic Party primaryfor mayor. There is no Republican mayoral primary.

Whoever leads the city of nearly 50,000 will play a role inhow Harrisburg struggles to shrink a mountain of debt whilemaintaining basic services and paying - or not paying -bondholders.

The mayor must be "willing to work through the problems andget to the next step. In order to do that, you need a certainamount of charisma, a certain amount of cooperation, and a fairmargin of public support," said John Hallacy, head of municipalresearch at Bank of America Merrill Lynch. "Given the severityof the situation, that's a lot to ask for."

The ghosts of a questionable 2007 bond deal hauntHarrisburg, which is at least $340 million in debt - somereports put the figure at $370 million - thanks largely to themunicipal bonds it guaranteed to finance upgrades to itsproblematic waste-to-energy trash incinerator.

Harrisburg also faces a cumulative deficit of at least $13million, including more than $9 million of debt service paymentsthat went unpaid in March and September, according to a March 28status update from William Lynch, the state-appointed receiver.

CONTROVERSIAL MAYOR FACES RIVALS

Two candidates hope to unseat Mayor Linda Thompson, anoutspoken and controversial first-term Democrat. The victor inHarrisburg's Democratic primary is also expected to winNovember's general election, although at least one challenger,Independent Nevin Mindlin, will run in the fall.

Thompson is African-American and has a strong base ofsupport in Harrisburg's black community, which makes up 52percent of the city's population.

But beyond her base, "she's got very fragile relationshipswith almost every constituent group you could imagine," saidTerry Madonna, director of Franklin & Marshall College's Centerfor Politics and Public Affairs, who has conducted polls ofPennsylvania politics for more than a decade.

Receiver Lynch, the only person with the power to sendHarrisburg into bankruptcy, has so far said he sees that optionas a last resort. But even the threat of bankruptcy can beenough to bring different sides to the bargaining table.

Lynch attempted to negotiate borrowing money through a taxanticipation note during late 2012 and early 2013, but financialinstitutions still "have concerns" about Harrisburg's creditworthiness, he said in his March update.

None of Wall Street's three big credit rating agenciescurrently rate the city of Harrisburg's debt.

The mayor must work with Harrisburg's state-appointedoverseer, the City Council and a host of other players to pushahead a court-approved recovery plan. The plan includes the saleand lease of city assets, but so far no deals have beenfinalized.

The mayor also helps negotiate with police, fire and publicemployee unions on labor contracts that, if altered, could savethe city money on health care and other costs.

BOND DEAL HAUNTS POLITICIANS

One of Thompson's two top rivals, independent bookstoreowner Eric Papenfuse, hopes that the 2007 bond deal will hauntboth Thompson and challenger City Comptroller Dan Miller.

Thompson and Miller were on the City Council when itapproved the bond financing, and both got there because ofsupport from former Mayor Steve Reed who had served 28 years.

Miller was the only City Council member to vote against thebond financing.

It was during Reed's administration that the incineratordeals were cut and, later, that some of the more troublesomefinancial disclosure problems occurred, leading to the SEC'sfraud charge earlier this month. The city paid no penalty in thesettlement and no individuals were named.

Thompson has made a number of problematic statements sincetaking office in January 2010. She once referred to Miller -Harrisburg's first openly gay elected official - as a"homosexual, evil little man," according to local media reports.In subsequent stories, she did not deny the comment.

She also lost several close staffers during her first yearin office. Five of them told the central Pennsylvania newspaperThe Patriot-News that she created a toxic, abusive atmosphere.

Papenfuse is no stranger to local politics. In February2007, the City Council appointed him to the board of theHarrisburg Authority, which owns the incinerator. Papenfuseopposed additional funding for the incinerator upgrades andlater quit the board.

Thompson and Papenfuse have said they do not want the cityto file for Chapter 9 municipal bankruptcy. Miller, however,believes bankruptcy is inevitable, and that it should be donebefore the city's assets are sold off.

The only poll of the race so far, published on May 13, foundThompson, with 13 percent of the vote, losing to Miller andPapenfuse, who would be tied at 30 percent each. Some 23 percentwere undecided. Fifty-seven percent of those polled stronglydisapproved of Thompson's performance on the job.

The poll, conducted by Susquehanna Polling and Research forthe local ABC News station, surveyed 300 Harrisburg Democrats bytelephone and has a margin of error of 5.6 percent.